Classify the following adjusting entries as involving prepaid expenses (PE), unearned revenues (UR),
accrued expenses (AE), or accrued revenues (AR).
a. To record revenue earned that was previously received as cash in advance.
b. To record annual depreciation expense.
c. To record wages expense incurred but not yet paid (nor recorded).
d. To record revenue earned but not yet billed (nor recorded).
e. To record expiration of prepaid insurance
a. UR
b. PE
c. AE
d. AR
e. PE
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a. To record revenue earned that was previously received as cash in advance.
- This involves unearned revenues (UR) because the revenue was received in advance but has not yet been earned by the company.
b. To record annual depreciation expense.
- This involves accrued expenses (AE) because it represents the portion of the asset's cost that has been used up in the current period, but has not yet been paid or recorded.
c. To record wages expense incurred but not yet paid (nor recorded).
- This involves accrued expenses (AE) because it represents expenses that have been incurred but not yet paid or recorded.
d. To record revenue earned but not yet billed (nor recorded).
- This involves accrued revenues (AR) because it represents revenue that has been earned but not yet billed or recorded.
e. To record expiration of prepaid insurance.
- This involves prepaid expenses (PE) because it represents insurance expenses that have been paid in advance but have not yet been used or expired.
To classify the adjusting entries, we need to understand what each term means:
- Prepaid expenses (PE): These are expenses paid in advance but have not yet been used or consumed.
- Unearned revenues (UR): These are revenues received in advance but have not yet been earned.
- Accrued expenses (AE): These are expenses that have been incurred but have not yet been paid or recorded.
- Accrued revenues (AR): These are revenues that have been earned but have not yet been billed or recorded.
Now, let's classify the adjusting entries provided:
a. To record revenue earned that was previously received as cash in advance.
This entry involves unearned revenues (UR) because the revenue was received in advance but has not yet been earned.
b. To record annual depreciation expense.
This entry involves neither prepaid expenses, unearned revenues, accrued expenses, nor accrued revenues. It represents the allocation of an asset's cost over its useful life and does not fall into any of the specified categories.
c. To record wages expense incurred but not yet paid (nor recorded).
This entry involves accrued expenses (AE) because the wages expense has been incurred (worked by employees), but it has not yet been recorded in the books or paid.
d. To record revenue earned but not yet billed (nor recorded).
This entry involves accrued revenues (AR) because the revenue has been earned, but it has not yet been billed or recorded.
e. To record expiration of prepaid insurance.
This entry involves prepaid expenses (PE) because it represents the recognition of an expense that was previously paid for in advance (prepaid insurance) but has now expired or been used up.
By analyzing the nature of each adjusting entry, we can classify them as involving prepaid expenses (PE), unearned revenues (UR), accrued expenses (AE), or accrued revenues (AR).